What is Tax Cost Basis on Investments?

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Apr 03, 2017

By Tory Meiborg, President and Partner at World Trend Financial

When a capital asset (like a stock) is sold in a taxable account, any gain is subject to taxation and must be reported on an individual's tax return. To figure whether you need to report a gain or a loss, you need to know the tax cost basis.

What is tax cost basis?

For stocks and mutual funds, the tax cost basis is the price paid to purchase the security, including reinvestment of dividends and capital gain distributions. If the security was purchased after 2011, brokerage firms have been required to track the basis and report the information to the investor and the IRS.

What if the security was purchased prior to 2011 and the brokerage firm does not report the basis?

The investor must provide the number and it must be based in fact. Ideally, the investor kept old transaction confirmations. If not, the basis can be recreated. While this can be difficult, World Trend can assist clients with this process. But it must start, at the least, with a reliable original purchase date. Absent that, the investor must report zero basis, meaning the entirety of the sales proceeds will be subject to taxation. If the proceeds from sales are significant, this is the last resort. With some guidance from the investor, we can provide at least partial basis.

Why is this important now?

Given the gains in stock markets over recent years, and given the relatively recent adoption of mandatory basis regulations, this particular issue is coming up more than it has in recent years. It is important that investors know the rules on capital gains, and how to track tax cost basis. We can help with this. If you hold existing investments for which basis is not tracked, there are some steps that should be taken prior to sale to make the process easier going forward.

What is “stepped up basis”?

Stocks that were received as the result of an inheritance often benefit from stepped-up basis. Essentially, the basis of a stock resets on the date of death. By knowing the date of death, we can help recreate tax cost basis.

There are many "in's and out's" to establishing basis, so if you have questions, please contact one of our advisors at World Trend Financial for assistance. We can be reached in Cedar Rapids at 319-364-3041 or in Iowa City at 319-339-4884.